Your 401(k) fees: High, or just normal?

By Matthew Heimer

High 401(k) plan fees are a growing point of contention between employers and savers; just this week, International Paper agreed to settle a lawsuit in which employees had accused the company of putting them in an inappropriately expensive plan. But the definition of “high” remains something of a moving target. While evolving federal regulations are making it easier for savers to figure out how much they pay, many people have no idea whether fees of, say, 1% a year represent a great deal, a rip-off or an industry norm.

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Higher fees mean smaller blue lines for you.

As Kelly Greene of The Wall Street Journal reports this week, some third-party advisor services are wading into this space to help savers figure out whether their plans fall on the right side of the line. As a starting point, it’s good to know what the industry average is: According to a recent study by the Investment Company Institute, a trade group that represents mutual-fund companies and other financial-services interests, the median 401(k) participant pays 0.78% of his or her assets annually in fees – a figure that includes both the plans’ administrative expenses and the fees charged by the funds in the plans. People who work at smaller companies can expect to pay more than that, Greene notes, since those companies don’t get the same volume discounts from the financial firms that administer 401(k)s.

Within those parameters, there’s some consensus among the commentators Greene cites. Mike Alfred of BrightScope, a financial-information firm that publishes some interesting ratings of 401(k) plans, argues that employees of any large firm should be “well under 1%” and preferably under 0.75%. Personal Capital, a financial-advice firm that offers a free fee-analyzing tool, puts everything under 1% in its “green zone.” Both BrightScope and Personal Capital say investors paying fees between 1% and 2% should be digging deeper to find out why their plans are so expensive.

If you’re paying 2% or more, you’re getting into the territory where the fees are a substantial drag on your ability to amass savings, and it’s time to explore other savings options. Alfred’s advice, as summed up by Greene: “Contribute only enough to get the full match from your employer and not a dollar more.”

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About Encore

Encore looks at the changing nature of retirement, from new rules and guidelines for financial security to the shifting identities, needs and priorities of people saving for and living in retirement. Our lead blogger is editor Matthew Heimer, and frequent contributors include editor Amy Hoak, writer Catey Hill, and MarketWatch columnists Elizabeth O’Brien, Robert Powell and Andrea Coombes. Encore also features regular commentary from The Wall Street Journal retirement columnists Glenn Ruffenach and Anne Tergesen and the Director of the Center for Retirement Research at Boston College, Alicia H. Munnell.